Managing Risk in Financing Agriculture1-3 April 2009, Johannesburg, South Africa

Working Group A: Microinsurance as a Risk Management tool in Rural Areas

Dr. Brigitte Klein, Financial Systems Development, German Development Cooperation (GTZ) and Federal Ministry for Economic Cooperation and Development (BMZ)

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What is Microinsurance?

Microinsurance is

insurance accessed by low-income people provided by a variety of institutions run in accordance with generally accepted

insurance core principle funded by premiums

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Microinsurance is a financial services, besides savings,

credit and cashless payments which the poor use to manage their risks

closely linked with other financial services via clients, products, insurers, intermediaries, policy decision makers, regulation and national strategies

a strategic tool for different development agendas (pro-poor financing, agricultural and rural development, social security development, mitigation of climate change)

What is Microinsurance? (2)

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Major Risks in Rural Areas

Major Risks that are insurable:

1. Illness and injury: HIV/AIDS, Malaria and Tuberculosis, accidents

2. Death: loss of life (accidental and other reasons)

3. Loss of assets and production due to harsh weather effects (droughts, flooding, storm), and other risks such as theft and fire

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Microinsurance can help to reduce vulnerability of rural

households and mitigate the perils threatening their lives, productivity and assets

assist in promoting investment and productivity by securing the lending risk for agricultural, investment

support asset building by securing housing loans and helping to avoid that savings and other assets are depleted in case of an emergency

…contribute to spurring rural development! .

Potential Impact of Microinsurance in Rural Areas

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Access – Facts & Figures

Access to insurance remains a huge challenge: Brazil: insurance premiums account for 3.38% of GDP China: 2.70 % of GDP Compared to 15 EU countries with approx. 8% of GDP Bangladesh: premiums are less than 1% of GDP

In African countries like Nigeria, Ethiopia or Algeria insurance coverage is less than 1 % of GDP

South Africa and Namibia are outstanding: 15.3 and 8.11 % Average of Africa: 4.35 % Source: SIGMA Report (2008)

Only 0.3 % of the poor population in Africa has access to microinsurance.Landscaping Study Microinsurance Centre (2007)

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The Business Environment in Rural Areas (1)

Compared to urban areas, microinsurance provision in rural areas faces a number of serious challenges:

(1) Infrastructure is less developed (roads, hospitals, telecommunication, water and sanitation, schools)(2) Banking network is weaker (3) Weather and health risks are more widespread and severe (4) Population density is often low and distances are far

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The Business Environment in Rural Areas (2)

Underwriting is more sensitive and costly as risk exposure related to health, property loss and business failure is higher.

Covariant risks strike hard. Reaching scale is more difficult. Distribution (sales, premium collection, flow of

funds) is more difficult and costly

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When buying insurance, low-income households often suffer from weak financial capability and literacy misinformation, abuses, and low-value products and services. They lack trust and good experiences. Educational levels are lower. Clients are more vulnerable.

Microinsurance Clients in Rural Areas (1)

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Microinsurance Clients in Rural Areas (2)

Higher investments for financial literacy work are required.

Combination of financial services (insurance as an add-on) has proven more effective.

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The mostly urban-based insurers are not ready to serve rural low-income markets.

Demand is not known or understood Products are weakly designed and range is narrow

Systems are not adapted

Premium collection

Back-office administration

Claims management

Marketing strategies and distribution are weak

Costs do not cover high transaction cost

Risks assessment is difficult (no mortality and morbidity tables)

Challenges for Insurers

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Many rural-based intermediaries are reluctant to sell microinsurance, and have no know-how on microinsurance.

Management and staff of banks is often not convinced about relevance, business potential and techniques of microinsurance

Sales force is not sensitized and trained

Systems are not adapted (premium collection, claims management)

Competition about scarce funds of households with other financial services

Marketing strategies and distribution are weak

High transaction cost

Challenges for Intermediaries

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Most networks, associations, training providers, reinsures, researchers and IT supporters are ill-equipped in terms of offering microinsurance support services.

Public goods (data, transparency, code of conduct, awareness campaigns)

Curricula and TOT for training and coaching is not existent (product development, marketing, administration)

Technology solutions are not developed

Demand studies are lacking, including the know-how to implement them

Challenges for the Support Infrastructure

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The policy framework including regulation and supervision is not conducive to rural microinsurance development.

Awareness and know-how of authorities is weak

The different policy and regulatory frameworks lack coherence (finance, agriculture, health, social protection, consumer protection)

In a landscape of diverse authorities mandates are disperse for regulation and supervision for the various types of providers (Insurers, Banks, Credit Unions, MFIs)

There are mandate crossings between various government agencies (e.g. mutuals)

Subsidies can impede market based solutions.

Challenges in the Policy Framework (1)

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Challenges in the Policy Framework (2)

Supervisory capacity is limited - and particularly low in rural areas - which impedes the supervisor from being proactive (Rural Banks in Ghana, Ethiopian MFIs).

Policy and regulatory barriers are not understood.

High fiscal burden on premiums and intermediation weakens demand.

General customer protection frameworks and financial literacy work often do not include insurance or low-income customers

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In most countries, regulations are not adapted to the specific features of microinsurance.

Insurance Regulations

• Entry requirements

• Agent rules

• Demarcation between life and non-life lines

• Product regulation

• Capping of commissions

• Definition of insurance

• Customer protection

Other Regulations

• Cooperative laws

• Payment systems rules

• Foreign investment rules

• Know-your client rules

• Health regulations

• Banking or microfinance rules

• Tax rules

Challenges in Policy Framework (3)

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Challenges in a Systemic View

Consumer

protection

is a policy task,

but also a cross-

cutting challenge

involving all actors

at the three levels

of the financial system.

MACRO-LEVEL The Enabling Environment

Policy, legislation, regulation, supervision

MESO-LEVEL Support Infrastructure

Reinsurers, insurers, actuaries, market research organizations, networks and associations, auditors, adjusters, information technology providers

MICRO-LEVEL Retail Providers

Commercial, mutual and informal insurers; agents, brokers and intermediaries

POLICYHOLDERS

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1. The quality of value-for-money products is measured in terms of financial viability, demand-orientation and broad outreach.

2. Microinsurance is an integral part of the financial system and should be promoted as such; e g. via an “Access to Finance Strategy”

3. Coherence with other sector policies (Agricultural Development Policy, Consumer protection policy of Ministry of Trade) results in more effective approaches

4. Actors follow a market-based approach.

5. Customer protection and financial education are of utmost importance and requires crosscutting the involvement of all actors. Source: Draft BMZ Position Paper Microinsurance (2009)

Principles for Microinsurance Development

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The poverty oriented financial services industry is a very important player to promote microinsurance. They can decide to add microinsurance.

Sensitization of board, management and staff of relevance and potential of microinsurance as complementary financial service for risk management

Board and management need to choose a strategic option:

A - Linkage with insurer and acting as an intermediary

B - Creating a new insurer/microinsurer

Training of staff, development of incentive system, adapt procedures and systems

Sensitization and information of clients and marketing of new business line

Pushing a national agenda (consumer protection and financial education)

What can Banks and Microfinance Institutions do?

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What can insurers do?

Insurers can …

Learn and sensitize their board and management and train their staff

Research demand and develop new products

Implement pilots and study the impact of products and sales strategies

Motivate their networks to support them

Contribute in a national dialogue among the various stakeholders

Proactively seek and participate in the policy dialogue. Help the authorities to understand microinsurance better.

Cooperate with networks and the government in financial literacy and consumer protection work.

Be transparent and truly customer oriented. Honour claims commitments fast.

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What can networks and other supporters do?

Networks, research bodies, reinsurers can …

integrate microinsurance in their own agenda

support the learning process about relevance and successful models

push the implementation of pilot projects

motivate a national dialogue among the various stakeholders

participate in the policy dialogue

develop public goods (data, research)

include microinsurance into stakeholders’ agendas including donors

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What can policymakers do?

Policy makers and regulators/supervisors are the drivers for a national financial access policy to mainstream microinsurance. They can…

develop their understanding, assume ownership for the process, give the insurance supervisor a development mandate and provide resources

identify the key drivers in the policy framework to abolish policy and regulatory barriers

combine several policy tools to make them more effective and achieve greater impact more rapidly

speed-up regulatory innovations and other policy solutions by exchanging with other supervisors and

initiate a national dialogue among all stakeholders

develop a national agenda for financial consumer education including microinsurance